Framework conditions – advance agreement on regulations which are fair to both parties

Unfortunately, in usual practice both demand and supply sides continue to pay little or no attention to benchmarks when negotiating agreements. If framework conditions set down in writing exist at all, they often ignore important aspects or leave too much room for interpretation. This situation is frequently a consequence of the parties’ in­adequate knowledge of the specific material and leads to a greater need for coordi­nation during the benchmarking and subsequent delays. Obviously a price bench­mark has a certain inherent conflict potential arising from the differing interests of the two parties. The customer is under pressure to reduce his IT costs, while the service provider, in contrast, wants to maintain his profitability. This is the reason why appropriate attention must be paid to governance for each benchmark.

Framework conditions are documented in a form which is binding on both parties such as a master agreement. As a minimum, the framework conditions should define the most important procedural rules for all phases of the price benchmark. Among others, this includes such aspects as:

• When or how often and by what party a price benchmark can be initiated?
• How the benchmark provider is selected?
• What the requirements for the control group are?
• How the market price is defined?

This requires walking the fine line between creating unambiguous wording on the one hand while, on the other, restricting the degree of detail to the necessary minimum because exact rules regarding the methodology of the price benchmark in particular can lead to limitations during the later implementation.

Phases of an IT Price Benchmark

Figure 1 shows an overview of the various phases of a price benchmark as well as the relative expenditures of all of the involved parties for each phase. The individual activities within one phase can differ from what is shown due to the differences in the specific methods of the benchmark providers.

The services to be benchmarked and the benchmark provider are selected during the phase Initiation and Scoping. The data collection phase serves to gather all of the aspects of the service or service performance relevant for setting prices. The peer group is selected on the basis of this information. Finally, the performance differ­ences are normalized and the market prices are calculated, then validated and as­sessed in the next phase. Management presentation is the concluding step of the benchmark.